Can Diageo plc (ADR) (DEO) Outperform BEAM Inc (BEAM)?

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LONDON — If you’re interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren’t always as easy as they sound, so in this series, I’m going to compare some of the best-known names from the FTSE 100, FTSE 250, and the U.S. stock market.

I’m going to use three key criteria — value, income and growth — to compare companies to their sector peers. I’ve included some U.S. shares, as these provide U.K. investors with access to some of the world’s largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Diageo plc (ADR) (NYSE:DEO)Today, I’m going to take a look at drinks firm Diageo plc (ADR) (NYSE:DEO) and its US competitor BEAM Inc. (NYSE:BEAM), which between them own many of the world’s best known spirit brands.

1. Value
The easiest way to lose money on shares is to pay too much for them — so which share looks better value, Diageo plc (ADR) (NYSE:DEO), or BEAM Inc. (NYSE:BEAM)?

Value Diageo Beam
Current price-to-earnings ratio (P/E) 19.8 24.9
Forecast P/E 19.4 21.9
Price-to-book ratio (P/B) 7.9 2.1
Price-to-sales ratio (P/S) 4.5 4.0

Neither company can be described as a value investment, but based on historic and future earnings, Diageo plc (ADR) (NYSE:DEO) looks more affordable than BEAM Inc. (NYSE:BEAM). BEAM Inc. (NYSE:BEAM)’s valuation may also be supported by its brand assets, however — the company’s shares trade at just twice their net asset value, which is a relatively low multiple compared to Diageo plc (ADR) (NYSE:DEO)’s lofty P/B of 7.9.

Overall, I would choose Diageo plc (ADR) (NYSE:DEO) for value.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Diageo plc (ADR) (NYSE:DEO) and BEAM Inc. (NYSE:BEAM) compare in terms of income?

Value Diageo Beam
Current dividend yield 2.3% 1.5%
5-year average historical yield 3.3% 2.3%
5-year dividend average growth rate 5.9% 8.8%*
2013 forecast yield 2.4% 1.5%

*BEAM Inc. (NYSE:BEAM) was spun off from former parent Fortune Brands in 2011; this figure has been calculated on dividends paid from 2011-2013.

Diageo plc (ADR) (NYSE:DEO) looks the stronger choice for income — its 2.3% yield is 50% more than Beam’s 1.5% and Diageo has increased its dividend every year since 1999, providing a solid track record of growth.

Beam was only spun off from Fortune Brands in 2011, but my calculations show that since Beam became a dedicated spirits manufacturer, it has increased its dividend by an average of 8.8% per year, ahead of the increases delivered by Diageo. In addition, Beam’s payout ratio — the proportion of its earnings paid out as dividends — was only 33% last year, considerably lower than Diageo’s payout ratio of 43%, which suggests that Beam may have plenty of headroom for further dividend increases.

One downside of these companies’ premium P/E ratings is that both have dividend yields below the averages for their indices; Diageo’s 2.3% yield is well below the 3.2% average of the FTSE 100, while Beam’s 1.5% does not compare well to the 2.2% average of the S&P 500.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation — and realistically, most successful companies need to grow ahead of inflation, if they are to protect their market share and profit margins.

How do Diageo and Beam shape up in terms of growth?

Value Diageo Beam
5-year earnings-per-share growth rate 9.3% n/a
5-year revenue growth rate 7.5% n/a
5-year share price return 93.7% 47.3%*

*October 2011 to present.

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